Cash Flow Boost: Cost Segregation Tips for Investors

Eric Oliver  00:00
One side of the aisle really wants child tax credits, and they say, Okay, we’ll vote for your child tax credits. But you have to vote for this business-friendly bonus depreciation. The great news is those are always been tied together. So in 2025, when it expires, both the child tax credits and the bonus depreciation expire again in 2025. If this gets passed, it means they’re probably going to extend it again because, again, they want the child tax credits. The other side wanted the bonus depreciation. So it’s kind of a tit for tat, and it’s been working really well for real estate investors.

Greg Lyons  00:32
Welcome to the Passive Income Brothers podcast. 

Tim Lyons  00:35
Here, we take the fear out of real estate investing, using real-life stories of everyday successful investors. 

Greg Lyons  00:41
Let’s go. 

Tim Lyons  00:43
Welcome to another episode of the Passive Income Brothers podcast. My name is Tim Lyons, and today, I’m joined by two absolute rockstars, one of whom is my brother, Greg, how are you doing today, buddy? 

Greg Lyons  00:51
Tim never gets old. But I am ready to rock and roll today because we have a fantastic guest who knows Cost Segregation like the back of his hand.

Tim Lyons  00:59
So many of you might be driving or maybe after a walk or food shopping or folding laundry, and you’re saying, what the heck is cost segregation and don’t. Don’t turn I don’t want to know why would the passive income brothers want to talk to us about some minute thing like cost segregation, and what I’m going to tell you is, buckle up, get the notebook out, sharpen those pencils. Because, as my listeners know, Eric, I am infatuated with taxes. I’m obsessed. I love to learn about them. I love to learn how to use them. It’s one of the biggest expenses that we all face every single year. So, if you’re ready to learn about how real estate is the magic, almost as Tom Wheelwright calls it, the magic of taxes, let’s get ready for Eric over from the Cost Segregation Authority. How are you doing today, Eric?

Eric Oliver  01:20
Good. I’m glad to be here. Thanks for having me, guys.

Tim Lyons  01:53
Oh, well, it’s our pleasure. So Eric,  here at the Passive Income Brothers podcast, we are usually real estate focused right on more in the passive investing side and syndications multifamily self-storage, industrial triple net leases. And our investors get something called a k one statement at the end of the tax year. But a lot of people don’t know exactly what that means, right? There’s net income, and there are net losses, right? We’re losses from rental activities. And a lot of times, we hear something from our investor saying, Well, my tax guy or my tax Gao, or a lot of times, it’s only a tax preparer who doesn’t know what to do with this kind of stuff. So I want you to, bring it bring it, but we’ll go full circle on taxes. But can you just kind of give us a plain Jane explanation of what is a cost segregation study?

Eric Oliver  02:47
Yeah, that’s a great question. So Cost Segregation really is just accelerated depreciation on your real estate assets. So one of the great benefits and one of the reasons why a lot of people get into real estate is for some of the tax benefits. So there’s something called depreciation, which is the wear and tear on a building. The IRS basically says that residential units will deteriorate over 27 and a half years, and commercial units will deteriorate over 39 years. And so if you don’t do a cost segregation study, you’re taking what they call straight-line depreciation, so just to make the math easy, let’s say you buy a $390,000 office suite, that’s a 39-year asset. So you take 390,000 divided by 39 years, and essentially, you’re getting a $10,000 write-off every year for the next 39 years. And then that right off comes, it’s an expense, it’s a depreciation expense, it comes off of your taxable income, which is great, that’s, again, why a lot of us get into real estate is for some of these deductions. Now, if you do a cost segregation study, what we recommend is I don’t want my deductions. Now, I don’t want the IRS to hold on to these deductions for 39 years, I mean, hell, I’m probably not going to own the building in 39 years. So, I want to move forward or put forth as much depreciation as I can. The way you do that is through an engineering-based study where you go in and identify short-term assets within your building. So, for example, when you buy an office suite, you’re not just buying the parking lot, the desks, and everything inside, you’re also buying the flooring, you’re buying the cabinet, you’re buying the countertops, you’re buying the light fixtures, all those different components. Those components can all be segregated or, excuse me, depreciated over a much faster, more useful life. Carpet doesn’t last 39 years, and the IRS knows that the IRS actually says carpet is a five-year asset. The problem being is when you buy that office suite when you take that closing statement to your tax preparer and say, Hey, I bought this for 390,000. Your tax preparer has no idea about the contents of that building, let alone the value of those contents. And so they have to just take it as one big lump sum asset. Okay, the whole thing is we’re going to depreciate over 39 years. And so a cost segregation study is just as the name implies, we’re segregating the cost into different buckets, which allows you to front-load or accelerate that depreciation. And there are a number of reasons why you’d want to do that. There’s the time value of money, inflation, and a number of other reasons why you’d want to do that.

Greg Lyons  05:19
I was gonna say the time value of money is so important, right? And you want to take those depreciate that depreciation upfront because, as you said, you’re probably not going to own the buildings for 39 years or 30 years, everyone gets a 30-year fixed rate mortgage on their home, but typically, people don’t live in their homes for 30 years. So, when you talk about the time value of money and taking the depreciation upfront, what does that mean for the everyday real estate investor? And there’s something also called bonus depreciation, where, like, bonus depreciation, so if you could just kind of walk us through why we should want depreciation upfront? And what is bonus depreciation?

Eric Oliver  06:02
Yeah, those are great questions. So you want the depreciation upfront. Because $1 Today is worth way more than $1.39 years if you even own the building for 39 years. So what that means is I want my deductions now, I’m going to reduce my taxable income this year, which means I’m going to pay less taxes, I’m going to take that tax savings, I’m going to then go invest it in a new property, pay down my debt. I mean, hell, if you want to go buy a boat, go buy a boat, do what you want with that tax savings. But I want that now versus a smaller amount evenly spread out over the next 39 years. And so that’s really the whole idea behind the time value money, then again, you have to add inflation in there, $1. Again, $1. Today is worth way more than $1.39 years from now, inflation is a hot topic right now, obviously, how $1 last year is worth way more than $1 this year, just with the inflation rates we’ve been having. And so, again, front loading or taking that depreciation at the end of the day, if you own the building for 39 years in either scenario, it pencils out, you’re getting the same amount of depreciation. But do you want to even amount for the next 39 years? Or do you want it front-loaded and then maybe a smaller amount in those later years? Most people will choose to have it front-loaded. So they can then reinvest and put that money back to work for them. So that’s the answer to your first question. Your second question, bonus depreciation, is a great question as well. So that’s a term that gets thrown around a lot. Bonus depreciation really puts cost segregation on steroids. bonus depreciation has been around for a number of years, the IRS uses bonus depreciation to stimulate the economy. So if the economy is not doing well, they’re going to increase the bonus percentage; when the economy’s doing well, they’ll decrease the bonus percentage. And the idea is that just accelerates that even a faster rate of your depreciation. So an example would be, let’s say, you buy a bulldozer for a million dollars, and you bought it at the beginning of 2017. The rules at the beginning of 2017, for bonus were it had to be a brand new asset. So you couldn’t buy a used bulldozer, you had to buy a brand new bulldozer. And the asset had to have a useful life of 20 years or less. And it was a 50% bonus. So buy a million-dollar bulldozer a brand new one, I get to write off or expense or take depreciation at 50% of that. So I get a $500,000 write-off in year one, and the remaining 50% gets spread out over the use of the life of that asset. So again, it just takes it in front loads at an even faster rate. Now, that’s bonus depreciation in a nutshell, and we had some major changes at the end of 2017. With the tax cuts and Jobs Act, Donald Trump was our president, and Donald Trump owns a lot of real estate. And Donald Trump revised the tax code and made it very favorable to real estate investors. A couple of things changed. One, they increased it from 50% bonus to 100% bonus. So that was the big change. So, any assets placed into service between 927 of 17 and 1231 of 2022. were eligible for a 100% bonus. So that was a big change. The second thing, which I think was more important, or more impactful, I should say, was they added five words to the tax code. Remember I said before you had to buy a brand new bulldozer under the new tax cuts and Jobs Act provisions? It only has to be new to you, the taxpayer. So, they added five words to the tax cut. I don’t know if people in Congress even knew what the impact was of adding those five words. I think they just slipped it in, and I don’t think people realize, but all of a sudden, I don’t have to go buy a new bulldozer. I can actually buy a used bulldozer, which is new to me, the taxpayer, and all of a sudden, I get a 100% bonus. So if you go back to that, it’s a sample: I buy a used bulldozer now for a million dollars, I get 100%, or I get the full million-dollar deduction in year one. And so that’s great. So, let’s kind of go back a little bit. So, how does this apply to real estate? I don’t know how many of your investors are buying bulldozers. So let’s make this a little more, I looked at the real estate. So when you talk about real estate prior to 2017, prior to the tax cuts and Jobs Act, if you built a brand new building and had a cost segregation study done, we would go in and identify the five, seven and 15-year assets, those all have a useful life under 20 years or less. And you were eligible for 50% of those deductions in year one. But it had to be a brand new building, you couldn’t buy an existing building, fast forward it to the Tax Cuts and Jobs Act at the end of 2017. All the sudden, you can go buy an existing building, doesn’t it because those cabinets and that flooring is new to me, the taxpayer, even though it’s been there since 1980, it’s new to me, the taxpayer, all of a sudden, I get to put a value to those five, seven and 15-year assets. And I get to take 100 to 100% bonus depreciation on those assets. So to put some dollars to that, we usually segregate around 30%, of a building into shorter asset life. So if you buy, let’s say you buy a building for 1.2 million, you always have to back out land that is non-depreciable. So let’s say you buy it for 1.2 million, you determine that the land is worth 200,000. So that gives you a million dollars of what we call a depreciable basis. If you take that million dollars, do a cost study, we’re going to come in and identify about 30% of that, or 300,000 into those five, seven and 15-year buckets. Well, that 300,000 is now eligible for 100% Bonus, which means you get to take 100% of that, or 300,000 as a deduction in year one. So if I’m taking 300,000, and I’m in a 30% tax bracket, that’s a $90,000 tax savings in the first year when I buy that million-dollar asset. So in a situation where you have in syndication, that 300,000 of depreciation gets kicked out to everybody through the k one, it’ll show up as a negative number on your k one. And that negative number typically will flow through to your personal tax return, which allows you to take those deductions and potentially take those deductions against your income. There are some other nuances there about active and passive income and when those deductions can be used, but having that negative number on the books is a great way, a great tool that can be used for tax planning purposes. I mean, people can pull money out of retirement accounts and use that to offset there’s a number of different ways that you can use those deductions. But that’s kind of how bonus depreciation and Cost Segregation work. Now, I should just add one quick thing, bonus depreciation is scheduled to phase out. So I mentioned if you bought an asset between 927 of 17 and 1231 of 2022, you are eligible for 100% Bonus, anything bought in 2023 is eligible for 80% Bonus, and anything bought in 2024 is eligible for 60% Bonus, and it drops 20% every year until 2027 When you’re at 0%. Now, in saying that hot off the press recently, just this week, there was news that Congress has a bipartisan bill with bipartisan support that they’re pushing through right now to extend the 100% bonus through 2025. So those assets you bought in 2023, that you thought you were getting 80% bonus on. If this does get passed, I think there’s a 95% chance it will get passed. And they’re trying to fast-track it and get it passed by January 29. So today is the 19. So here the next 10 days, they should pass this bill, which will extend the 100% bonus through 2025. So that’s amazing for real estate investors, it’s again putting your deductions on steroids and creating huge savings, huge cash flow opportunities, and tax savings on these four investors.

Tim Lyons  14:15
Eric, are you saying that Congress is going to be able to agree on a bill and actually pass it? Is that what you’re telling me?

Eric Oliver  14:23
I said 95 for 95 that I left that 5% in there because it is Congress, and God only knows what could happen in the next 10 days. But yes, I do think what happens is it gets bipartisan support. And the way that it works is this bonus depreciation is also tied to the tax the child tax credit. So one side of the aisle really wants the child tax credits, and they say, okay, we’ll vote for your child tax credits, but you got to vote for this business-friendly—bonus depreciation. The great news is that those are always been tied together. So in 2025, when it expires As both the child tax credits and the bonus depreciation expire again in 2025, if this gets passed, which means they’re probably going to extend it again because again, they want the child tax credits, the other side wanted the bonus depreciation. So it’s kind of a tit for tat, and it’s been working really well for real estate investors.

Tim Lyons  15:18
Well, listen, this is not a political show. But when both people get a little something, and both people feel like they didn’t win, nor did they lose. That’s how things work, right? So, as a real estate investor, I would love for them to be able to pass this because it is powerful. And if you guys are listening in the car, you don’t have a chance to take notes. I mean, Eric just went on a three-minute, maybe four-minute, knowledge bomb-dropping spree that is a ton of information, he basically broke down what Cost Segregation is, how it’s beneficial, the anatomy of it, where it came from, why we love it, which we’re going to dive into a little bit deeper. And that, Donald Trump, love him or hate him or whatever. This was a bill that he passed, right? And here’s where I really want to focus on the next segment, Eric, and Greg, is that it’s all about when you’re investing in real estate. It should never be cited as shiny object syndrome, right? We should have a strategy, we should have a plan, we should be educated, right? Because this is not a liquid investment. You jump in, you jump out sexy profits, and you’re on the Lamborghini on Instagram, whatever. No, that’s not that’s not what it is. When you build out a team, what does that team look like? It’s a team like Eric over having a cost segregation, right? He has an accounting degree and an accounting background. It’s also having a tax strategist, not only a tax preparer but a tax strategist, you’re gonna pay for that. There’s no doubt about it, right? Because at the end of the day, yes, we want somebody to prepare our taxes and know what they’re doing and maybe get some money back. Who knows. But when you have a strategy, you can actually use these tools, and as my mentor, he doesn’t know it yet. But my mentor Tom Wheelwright, who’s one of the rich dad advisors, wrote a great book called Tax Free Wealth, and it needs to be mandatory reading. It’s a quick read. You can get through it and probably one or two sittings. And he writes it for the every day in investor right. Believe me if I can understand taxes and have an avenue acidity and a love for them. I promise you, you can do it too. Tom Wheelwright says something, Eric. In the first chapter of his book, he says two things. Number one, as a W two or 1099. employee, you work until about April or May each year just to satisfy your tax liabilities. And when you let that sink in, and you also cross reference Robert Kiyosaki is Cashflow Quadrant, if the ESPCI if you’re on the employee, right, or the sole proprietorship, side of the Cashflow Quadrant, which is also required reading here at cityside capital you don’t have a lot of tax write-offs you don’t have a lot of tax strategies and that’s why you just get we go to h&r block, nothing against h&r block, right? But you, that’s what you do, you just kind of roll through your taxes, and you’re on to the next thing. But when you’re a real estate investor, or you invest in small businesses or whatever, you’re an entrepreneur, that’s when you need a strategist, and I always say Greg and Eric, if you broke your ankle, you would not want to go see a neurosurgeon, right? They’re both doctors, they both have MDS next to the name, but you want to go see an orthopedic surgeon. And it’s the same thing for a CPA, right? There are farming CPAs, there are real estate CPAs, most of them, and I love CPAs are generalists, right? They’re just trying to keep their head above water, right? crank out returns and answer phone calls and emails and audits and stuff like that. So that was a long-winded way of saying, you need a good CPA, real estate focused if that’s what you’re going to do real estate focus, CPA, a real estate tax strategy, somebody like Eric Oliver and the cost segregation authority to be able to provide the documentation. Eric, maybe in the next segment, you can take us through what that report looks like. What does it cost? What are the parameters? How much of the building needs to be? Is there a minimum? On your website, there’s 100%. I don’t know if it’s a guarantee, but it’s defendable. It’s a defensible basically packet of documents that your CPA can now take and run with and defend you. So Eric, wasn’t, let’s maybe move into that. Somebody has a single-family home right now, or they have a small retail strip center, or they might have a hotel, who knows what they have right now? Or maybe they’re just a part of one of our syndications. And they’re part of the LPs, the limited partners, the passive income folks, and they get a k one at the end of the year, and they don’t understand if they got to say, I don’t know, say $1,000 in cash flow for the year, and they have a minus $63,000 loss. But they’re saying, wait a minute, I didn’t lose any money. Maybe talk a little bit about the tax preparation, the tax team, how does that as the cost segue work, and what is produced out of that study?

Eric Oliver  19:57
Yeah, that’s that’s a great question. So our deliverable is Back to you in your comments. Well, first of all, let me back up. One thing I love that you said because I say this myself, is there’s a huge difference between a tax preparer and a tax strategist. And I just want to make that point and drive that point home. Because I see all too often people with very complex returns, they’re real estate investors, they’ve got passive income, active income, maybe they’re invested in opportunities, and there’s a number of things. And they’re just going to the folks to your generalist, and I look at CPAs as kind of your generalist prac general practitioner, I use the same analogy that you use: I would go to my doctor if I’m sick. But if I, if I have our problems, I’m not going to go to my general practitioner and say, Hey, can you do heart surgery, you’ve got to find a specialist. So that’s the first I just want to drive that home. Because that’s underrealized in the industry, how important it is that people leave 10s and 10s of 1000s of dollars in taxes on the table. By simply by taking the quick, easy. Hey, I got the documents you have given to a tax preparer, those tax preparers, all they do is they input it into a tax software, and it spits out a number. And if you’re only meeting with your tax preparer once a year to hand them those documents, you probably are leaving a lot of money on the table, you really want a strategist who understands real estate, understands the different strategies, and you should be meeting with them least twice a year, if not every quarter to say, hey, what’s my income looking like? What kind of deductions am I going to have so that you can start planning sometimes, if you wait till the end of the year, it’s too late to make those, or if you wait till the following year till March right before the April deadline, and you’re handing them your tax stuff, it’s too late. So just want to drive that hall. Now, back to your original question: what does cost segregation look like kind of what’s the process, our deliverable back to you and the client, or your tax preparer, and the client is usually a 40 or 50 page report. That report has a number of different documents, it’s got all the backup documentation, and it’s got all the case law on why we’re able to appreciate carpet over five years. All that information is in there, the most important piece of information, your tax preparer is probably honestly going to skip the first 49 pages, they’re gonna go back to that last page, which is a revised depreciation schedule that has every item broken out in summarize, and what they do is they upload that into their tax software. And so instead of on your depreciation schedule, on a typical depreciation schedule, we’ll say building a million dollars land 200,000 When you do a cost study, you’re taking that building that says a million dollars, and you’re breaking it up into different chunks. And so now you’re gonna say five-year assets, things like flooring, cabinets, countertops, etc. 200,015-year assets such as your parking lot, curbs, gutters, asphalt, that’s a category all your land improvement, you’re gonna have a 15-year line that says in other 100,000. So you’re just breaking that up. That’s our deliverable back to the tax preparer. So those the IRS does the IRS is aware that Cost Segregation is becoming more and more prevalent with the passing of the Tax Cuts and Jobs Act. They revise their audit guide. So they do have agents that will audit these I’ve added some; we actually are in the middle of an audit now for one of our clients. I know people get nervous when I say audit, please keep in mind we do 12,000 Still we’ve done 12,000 studies, and we’ve been involved in just 13 audits over the course of the last 15 years. The audit we were involved in was only 5%. So only 5% of their cost segregation experts will actually work on anything that they consider small and small is like under $25 million. So that’s the first thing: the chance of these getting audited is very slim. But if they are audited, you do want to make sure that you have a quality report. So there’s the 13-step audit guide, the audit guide tells you all the different information that the agents are going to be looking for. And a quality report is going to follow those 13 steps. And so there are different types of reports out there. There are modeling, modeling, reports, and modeling approaches. So basically, you type some information into a software that models it, and it spits out a number. Those are less defensible than what we call an engineering-based study. But those modeling reports are significantly less than cost. So you asked about what is the threshold for somebody to get involved in cost segregation. If you’ve got anything with a basis, a depreciable basis, which would be your purchase price minus land of over about $250,000, you probably need to look into cost segregation. Now, it may make sense to just pay the small fee and get that modeling approach done. I tend to find out that just to run some analysis and seeing some of those reports, those reports are pretty conservative. It might only be $1,000 to get the study done, but because it’s using a modeling approach, it’s a really conservative approach. And so you might get 20 to 22% segregation. If you do an engineering study, you’re probably gonna get 30 to 35% segregation. And so it’s just a math equation to look and say, okay, yeah, I have to pay an extra $2,000 To get an engineering study done. But if I’m gonna save an extra 15,000 in taxes, then absolutely, it makes sense. So it’s just a math equation, you want to look at both of those. But I would say anything over about $250,000 of basis is worth doing. At least, I shouldn’t say it’s worth having an analysis done. And that it’s up to you. And your tax preparer, whether or not that makes sense. The other thing I want to mention is the price range. So these studies range anywhere from, for an engineering-based study, those are the types of studies we do here at our firm, they range anywhere from $3,000 for single-family rentals, up to $50,000 for large ski resorts. Now, I know that’s a wide range, typically, our average fees are around six to 7000. But you’re going to see at least a seven to 10x return on that investment, at a minimum. And with bonus depreciation at 100%. It could be 100%, or it should be 100x return on your investment. So that gives you kind of an idea of what types of properties are worth looking at. And then kind of the process is most Cost Segregation companies will do a free benefit analysis. So you’ll give them some basic information, and they’ll come back to you and say, okay, based on the information you provided, here’s a conservative estimate of what we think we can generate in terms of deductions. Then, you can give that to your tax preparer and your tax strategist and figure out if that makes sense. Once that analysis has been done, and you decide that makes sense, then their IRS does require a site visit. And that’s why sometimes those online services aren’t as defensible because there is no site visit. So, the IRS requires that their audit guide that a site visit be performed. One of the benefits that came out of COVID is we can do that virtually now, on a lot of projects, the larger product projects, we still want to send one of our engineers to the property. But on some of the smaller projects that we can do a site visit with the property manager or the owner takes 2025 minutes for us to do a similar to a Zoom call, we walk through the property together, once that site visits completed, usually takes two to three weeks to get the final report back. And that again, is that 40 to 50 page report. But that kind of walks you through the process of how Cost Segregation works.

Greg Lyons  27:30
Now, that’s great. And when we talk about a lot of different terms here, 100% bonus depreciation. Just one clarifying point: Can you are you able to get bonus depreciation if you don’t do a cost segregation study?

Eric Oliver  27:48
Great question. No. And the answer is because bonus depreciation only applies to assets that have a useful life of 20 years or less. So remember, if you buy a building and you don’t do a cost sake study, your whole building is going to be put on the depreciation schedule as either a 27-and-a-half-year asset if it’s residential or a 39 year asset if it’s commercial. So that’s why and that’s a great, I can’t tell you we actually attended a IRS conference last year, and had a number of CPAs tax repairs come to our booth. And they’re like, well, bonus doesn’t apply to real estate because it only applies to assets with a useful life of 20 years or less. So they’re like, Why does your sign say bonus? And we’re like, Well, if you stop and think about it, when you do a cost egg study, we’re finding five, seven, and 15-year assets that bonus does apply to, so that’s why the tax cuts and Jobs Act was huge for our industry. I don’t know if you remember they were Donald Trump on when he was running and he was talking about just expensing everything 100%. So if you buy a building for a million dollars, you get to just write the whole building off in the first year, which would have been detrimental to our company and our industry as a whole because we would have been all been without jobs, right? There’s no need for us to segregate something that you could just write off. Now we knew that wasn’t gonna get passed. That was a pie-in-the-sky type of theory. But bonus depreciation coming out of the tax cuts and Jobs Act was huge for our cost segregation industry because now you have to have a cost segregation study done in order to take advantage of the bonus depreciation.

Greg Lyons  29:30
Yeah, when you go with a reputable firm like yours, you get the correct report. And that’s the most important thing when you go to the IRS and you have you look for 100% bonus depreciation or 80% Bonus appreciation when you have that documentation. You’re in great shape. That was a layup for you, Eric. I mean, that was an easy one. But again, throwing around these terms, depreciation 100% bonus depreciation. There’s something called depreciation recapture. And I think that’s where a lot of Have novice investors kind of get tripped up? When you talk about depreciation? They say, Oh, yeah, that’s great, but have to pay it on the back end? And what’s that going to look like? And what are some different strategies? And can I mitigate any of that depreciation recapture? Can you just real quick walk people through what depreciation recapture is? And how that works? And is there any way to mitigate it? 

Eric Oliver  30:23
Sure, so depreciation recapture, if you think about it, you’re taking depreciation, let’s just use that office building, for example, you’re taking depreciation on a 39-year asset? Well, if you don’t own it for 39 years when you go sell it, the IRS is saying, Hey, you didn’t hold it for 39 years, we gave you deductions as if you were going to hold it. So we want some of that back. And so that’s what depreciation recapture is. The idea behind cost segregation, however, is you’re taking your deduction today against your ordinary income. So let’s say you’re in a 35% tax bracket and a 5%. State, you’re at 40%. In total, you’re taking your deduction today against income that’s being taxed at 40%. If and when you sell that, you’re paying some of that back at a recapture rate of 25%, or a capital gains rate of 8% At most, and saving the spread. And I think I’ll back into an example, Greg, because I think it makes a little more sense. But if you think about it this way, if you buy a building for $1,000,000 and 5 years later, and you sell it for 2 million, if you don’t do cost segregation, when you settle up with the IRS, you’re telling them that everything is doubled in value, right? I bought all this stuff to this office for 1,000,000, and 5 years later, I sold all this stuff for 2 million, so everything must have doubled in value. Well, the land may have gone up in value, the walls may have doubled in value, but certainly, my dirty, nasty carpet that stained is not worth double what I bought it for five years ago. So when you do cost segregation, you’re able to pull in that example, you’re able to pull the carpet and actually all of the five-year assets out of out of the sell of the asset. And you don’t pay tax on these because they’re worth zero, they carpets, a five-year asset, and in that example, we owned it for five years, so it has zero book value. So why are you selling your this is where the light goes off? When we explain this to tax preparers. I say, Well, why are you selling your client’s carpet for double what they paid for it when they bought the building five years ago? And they’re like, Well, I never thought of it that way. It’s always just been treated as one big asset. And you have to pay tax on it. And so I get to kind of summarize the idea as you take your deduction at a high rate and pay back a portion of it. And that portion is dependent upon how long you’ve owned the asset, you’re paying back a portion of it at a lower rate at a future date and saving the spread. And so as long as you’re holding the asset over one taxable year, usually the rate arbitrage is going to be enough to not only cover the cost of the cost study but also create significant tax savings.

Tim Lyons  33:03
So, Eric, this is all like, first of all, I want to give you a lot of props, your public math, my friend, is on point. And my public math is god awful. So I really want to give you a lot of, like, props, and if I can give you a fist bump through your screen here, I will because I love that. Number two says a lot of heavy info information, right? I mean, like you, if you don’t understand the words if you don’t understand the concepts today, I fear you’re not right. There’s a ton of information. Eric is a phone call away. There are podcasts, webinars, ebooks, and tax-free wealth by Tom Wheelwright. I mean, there’s masterminds, there’s conferences, I mean, there’s so much out there that, believe me, if Ray can understand this kind of stuff, then anybody can really, really understand this kind of stuff. So you didn’t bow. So I just want to tell people to listen, don’t shy away from, oh, well, real estate’s too. It’s too much I don’t understand it. It’s spreadsheets and cap rates and LTVs and costs a big and, there’s a lot to this. And that’s why people, when they take a risk in real estate, can they get paid for it? With that being said, because we’re registered representatives of a broker-dealer, I just want to reiterate for folks that listen, Greg, nor I, we are not CPAs we’re not tax, or legal advisors, or authorities. This podcast is purely for entertainment and education. And for you to take the next step. Just let what’s out there and introduce you guys to people like Eric because they’re there to join your team. So Greg, with that being said, I think it’s time now that we try and transfer over to the the last three questions of the show. Are you ready? All right. So Eric, speaking of the rich dad advisors, one of our de facto mentors is Robert Kiyosaki, and a lot of us out there who have seen the light if you will, and we become real estate investors, and we kind of reframe our financial education. We go to Robert Kiyosaki, right, Rich Dad Poor Dad Cashflow Quadrant, all those things. But Robert says something in his older age now; you could be a little bit cynical, I guess. And he says something that said goes like this. He says savers are losers and debtors are winners. What does that mean to you?

Eric Oliver  35:28
Well, that’s a great question. So I think that you, the financial system, the tax code is built around the ability to invest in all different types. I mean, the whole tax code in general, if you actually read the 1000s, and 1000s of pages, there’s very few that I think Tom says this all the time, there’s very few pages that tell you what you have to pay tax on. The other 1000 pages tell you how not to pay tax. And so the government uses the tax code to incentivize and get across what it is they’re trying to accomplish. And I think when you can find out to go back to your quote, there when you can find a way to use other people’s money or to use your own money that instead of paying it to tax, you come back and you bring that money back through Cost Segregation of some of these things, we’ve talked about using your other people’s money using your money that normally would have gone to tax to start investing. The savings can be incredible. And I’ll give you a quick example, just because it ties to cost sake. When we do a cost egg study, we do the cost study on the full purchase price, not your down payment. So if you can leverage a bank, if you got credit, and you could leverage a bank loan, oftentimes, especially with 100% Bonus, you’re getting 80 to 100% of your downpayment back. So I just bought her I just spent $100,000, to buy a million dollar property, let’s say 20%, I put 20% down, I use 200,000 to buy a million dollar property. I took a loan out for the other 800,000, I do a cost egg study, it creates a 30 or 40% deduction at what is it a million dollar that’s $400,000 of deduction. If I’m in a 40% tax bracket, that’s $160,000 tax saving. So I spent 200,000, I got 160,000 back, and now I’ve got a million-dollar asset. And again, I’m using somebody else’s money. And so yes, you can save your money, you could put it in the bank and get your 2% from your credit union. And I don’t think it’s that much. Your half a percent from the credit union, but investing in real estate, there are huge opportunities to be able to create significant significant.

Greg Lyons  37:37
So there’s no doubt about it. And once again, I know it’s him who already mentioned this, but your public math, I am so nervous when you spit out that 160 right there. I was like, he nailed it. But I was really old numbers idle, but still, there’s a microphone, there’s a recording, this is going on to the old interwebs. So you never know. But kudos again. This has been a really good class and kind of cost segregation, which is kind of not right down the fairway when you talk about real estate investing. So this next kind of thought we have is important around the education realm, and it’s from Jim Rohn. That said, formal education will make you a living, and education will make you a fortune. What does that mean to you, Eric?

Eric Oliver  38:29
That’s a great well, I can tell you firsthand, I just had this I have a 16-year-old son, and I just had this conversation with him because he’s like, Dad, why are we doing this math, I’m never going to need to know the slope, or rise over run, or any of those things we had to learn in math. And I think experience is way more valuable than a normal, traditional education. The reason I say that is I look back on my college. I went to school, it took me six years to get a four-year degree, and my kids gave me a hard time. I’m like, Hey, I was going, like, those are called doctors. And I’m like, I know, son, I just have a just took me a long time. I’m not a doctor. But the thing I learned most in my schooling is perseverance, number one, and the ability to manage my time and get things done. I can’t tell you what war was. What I mean is I can’t remember my history classes, my world history, I can’t remember most of my math I, I love math, and I excelled in math, and I can remember most of my statistics class or algebra, but what I can do is that and what I’ve learned to be able to do through going through college was the ability to to persevere, get things done and experience as part of that. And so, people, I’m a pretty conservative person. I don’t usually jump into things that I don’t know or that are risky, but there have been times in my life when I’ve just had to take the plunge and say,  what, this is not something you’re an expert? Get out, but like you guys have said multiple times, surround yourself with experts I learned that lesson the hard way. I am cheap, to be honest with you. I’ll give you a quick story. I bought a stereo as a 21-year-old kid I bought a stereo for my car. The stereo place wanted $250 to install it, I said absolutely not, I can do it. I went home, it took me three days, I had to end up calling them back because I didn’t know how to get the cable from my battery to my trunk. Had to call them back, and at the end of the day, I had to pay them $350 to fix the job that I did incorrectly. So, learning the hard way that sometimes you have to take the plunge but surround yourself with people who have the knowledge and you just got to do it. You just have to trust yourself, know what you’re good at, and then surround yourself with experts. You can’t be what is the saying I’m horrible at sayings, the jack of all trades, the expert of nothing or something along those lines. But a little you got to find what your niche is and be good at something. But then you also have to be humble enough to say, You know what? My design work sucks. I’ve tried designing flyers, they look like a kid did him in junior high or something, know what you’re good at. Then, outsource the rest, build a team, and go back that way. But I don’t know if that was a great answer to your question. But hopefully, that is Alright,

Tim Lyons  41:18
well, you’re in good company. Greg and I are both supremely cheap, Greg’s worse than I am. And it took me four and a half years to get my, well, almost five years, I guess five years to get my four-year degree. So you’re in great company here, Eric Murphy. So listen, so when if I’m not at a party, people love to say well, Tim’s a fireman. And I was in the ER nurse as well, Tim’s a fireman, and Tim’s a nurse, and people go, Oh, my God, that’s great. That sounds like a great combination. Tell me more about it. So if you’re, if you’re out at a party, or you’re with it at a backyard barbecue, and people like, Well, Eric, what is it? What is it that you do? And you’re like, Well, I do cost segregation. So Right. And then you go into the whole thing about real estate, right? I mean, I would be your best friend at the party. And I want to know a lot more. Right. But when you get around to it, and people say, Well, Eric isn’t investing in real estate just too risky. What would you say to that?

Eric Oliver  42:16
Historically, it depends. There are people who are looking for a quick dime. And if you’re looking for a quick dime, you’re gonna find yourself in real estate deals that don’t pencil out or that don’t end up making you money. Real estate is a long-term play, in my opinion. Yeah, you’ve got wholesalers out there who can find deals and flip them pretty quickly and stuff, but it might in my world and in my thoughts. I think real estate is a long-term play real estate, oh, people need a place to live, there’s limited space in our country to live and or to do business, for that matter. And so, I think real estate will continue to go up. It’s a long-term investment. If you’re looking at it in the long term, it’s definitely not risky. You’ve got to surround yourself with good people, you got to educate yourself. There’s a lot of nuances to it. But again, if you’re in it for the long haul, I don’t think it’s risky at all. It’s just I think there are bad situations where people get into it for the wrong reasons; they get into it to make a quick dollar because their friend sold, bought a building for 500,000, and sold it for a million so they think they can come in and do that in a year or two and it’s just not the case. But I think it’s a great tool. It’s a great way to diversify it What am I am 44 years old, it took me till I was 41 years old to realize that I pulled my money out of my 401k that was getting 6% or 7% and put it all into real estate. I had to 401k from a previous copy, so I did say I put it all I put all of one of them into real estate I wanted to make sure I was diversified. But no, I think it’s a great asset class to be able to create long-term wealth. My goal, just like a lot of investors’ goals, is to one day be able to retire with some of my investment properties and live off the cash flow from those properties. 

Tim Lyons  44:03
So well, listen, you’re in good company because Greg and I are basically screaming from the mountaintops, if you can create if you can create your monthly passive income to be equal to or greater than your monthly expenses, you have now attained financial freedom. It’s not 5 million in the bank. It’s not 20 million in the bank. It’s not 100 billion in the bank. It’s your income, your passive income, equal to or greater than your monthly expenses. So whatever, this has been an awesome masterclass on cost, say taxes, and bonus depreciation to the listeners, it was heavy, right? So if you don’t understand it, go back and listen, get the notebook out when you get home, take some notes, hop on a call with Eric, and go to his website, which is cost segue. authority.com That’ll be in the show notes. Eric, what did I miss? How can people get in touch with you further? And just some closing thoughts? 

Eric Oliver  44:58
Yeah, no, so you can reach me, our website is a great place: www.costsegauthority.com. My contact information is on there, please use this as a resource, you guys, we’re kind of a niche accounting firm, we don’t do tax returns here. So don’t call me and ask me about earned business income or child tax credits because I don’t know anything about that. But feel free to call me and ask me any real estate or depreciation questions you may have. We don’t build by the hour, we’re happy to help in any way we can. So definitely reach out to us on there. And then just to reiterate, what we both talked about, but I think it is so important, is to make sure you find yourself a tax strategist who understands real estate, I can’t emphasize that enough. Too many of us have our eyes on the next deal, adding more doors to our portfolio, etc. And it’s not what you make, it is what you keep. And so people lose focus on the tax side. Try to remember who I was. It wasn’t Tom Wheelwright, it was somebody who was telling me, it’s that old sports analogy. A lot of people, especially in this day and age, when you look at basketball, I coach my son’s basketball team. And it’s all about being Steph Curry and going and knocking down threes. There’s very little defense in basketball anymore. But we can’t lose focus on that. And so I look at the tax strategies, the defensive side of real estate, you’ve got to be able to play defense, you got to be able to keep some of the money that you’re making, by going out and bought and buying new doors and investing in new properties. And so, just definitely keep that in mind. But this has been great. I appreciate you guys having the time to go through this. 

Tim Lyons  46:35
Well, you’re in good company. Like I said, my brother, because Greg and his wife both played college basketball on the division one level, his side is probably in that his son is 16. He’s on the same pathway. And our dad played college basketball. So anyway, listen, this has been awesome. Definitely reach out to Eric Oliver with the Cost Segregation authority. use him as a resource. begin building out that team. If you need more information about accountants, we’ve done two or three shows of Greg now with accounting firms, talking about different strategies for building out the team, so you don’t have resources. That’s going to do it for this week’s edition of The Passive Income Brothers podcast, and we look forward to serving you again next week. Thank you for listening to another episode of the Passive Income Brothers podcast. We would be grateful for your support of our podcast by giving our show a five-star rating and review and subscribing to our show on your favorite podcast platform. Don’t forget to take inspired action after listening to this show so that you can start building out your passive income streams. Finally, head over to citysidecap.com to connect with us and find out more information about how to get started passively investing in real estate.